Category Archives: Business Law

Congress is currently poised to create a number of restrictions on the ability of the government to search email and other digital content. While it is unclear what form such legislation would take, there is a bipartisan consensus that something needs to be done for two reasons: (a) United States citizens need to have more definable privacy protections in their electronic communications and (b) American companies are finding it difficult to compete globally because foreign companies are reluctant to buy American software and other applications that may provide a means for the government to spy on them.

Much of this debate was spurred by a 2010 case brought down by the Sixth Circuit Court of Appeals. That case U.S. v. Warshak, 631 F.3d 266 (6th Cir. 2010). That case dealt with the issue of whether the government’s review of private email could constitute an unconstitutional search and seizure. The Sixth Circuit found that it did. As the court wrote,

Warshak argues that the government’s warrantless, ex parte seizure of approximately 27,000 of his private emails constituted a violation of the Fourth Amendment’s prohibition on unreasonable searches and seizures.12 The government counters that, even if government agents violated the Fourth Amendment in obtaining the emails, they relied in good faith on the Stored Communications Act (“SCA”), 18 U.S.C. §§ 2701 et seq., a statute that allows the government to obtain certain electronic communications without procuring a warrant. The government also argues that any hypothetical Fourth Amendment violation was harmless. We find that the government did violate Warshak’s Fourth Amendment rights by compelling his Internet Service Provider (“ISP”) to turn over the contents of his emails. However, we agree that agents relied on the SCA in good faith, and therefore hold that reversal is unwarranted.

This case is notable because after it was decided, a number of internet service providers began to require search warrants for email. It is entirely possible that the standard for obtaining emails may be further refined once the current legislation reaches the president’s desk.

May a Seller seek to void a contract for sale of his business by taking the position that the sale contract was violated and therefore unenforceable, when the seller itself is the one that did not comply? That issue was raised in Meadowbrook Industries, LLC v. Walker Management Systems, Superior Court of New Jersey, Appellate Division, Docket No. A-3568-11T4 (March 5, 2013).

In that case, the seller violated a contract for sale of a waste disposal business by failing to obtain the approval of the New Jersey Department of Environmental Protection before entering the agreement. NJSA 48:3-7(c). As it turned out, the seller was the one who wanted to scuttle the deal. It tried to argue that because the requirement had not been complied with, the contract was unenforceable.

The Appellate Division of the Superior Court of New Jersey rejected that argument. It held that the seller’s legal theory was barred by the doctrine of unclean hands. What this meant was that the party asserting the breach could not have caused that breach. The law protects those who did not cause their own harm.

On June 28, 2013, Governor Chris Christie signed a law (Bill S-2151) which requires judges in New Jersey to evaluate prenuptial agreements as of the date of their signing and not as of the date of their enforcement. This was a major change in the law.

It is of particular concern to business owners considering marriage. Typically, an owner will want to protect the business from being mandatorily sold in the event of a divorce. This law strengthens the enforceability of prenuptial agreements; therefore, it makes the protection afforded business owners that much more predictable.

The import of the law is that it prevents judges from considering the changes in circumstances between the time of signature and the time they are to be enforced. Prior to its enactment, N.J.S.A. 37:2-32 required judges to interpret premarital contracts as of the date of their enforcement. Therefore, if a contract was fair when it was signed, but when it was enforced would leave one spouse without financial support, it would be subject to attack.

If an employee “voices a complaint about behavior or activities in the workplace that he or she thinks are discriminatory,” but it turns out they are not, is the employee still protected under the N.J. Law Against Discrimination? That issue was addressed by the Court in Battaglia v. UPS, 214 N.J. 518 (2013).

In that case, an employee of UPS was demoted after he complained that managers had made derogatory comments about women and certain other activities. However, he was unable to prove that the discrimination actually took place.

The Supreme Court determined that it would not matter if the activity was actually contrary to law, so long as the person complaining about it had a good faith basis to believe it was. As the Court noted “we do not demand…that he or she be able to prove that there was an identifiable discriminatory impact upon someone of the requisite protected class.”

The basis for the Court’s ruling was that the N.J. Law Against Discrimination is a remedial statute. That means that it is meant to address a social ill, in this case, discrimination. Therefore, it will be read expansively so as not to discourage people from making reasonable complaints that might happen to turn out later to be unprovable.

Are residential structures that are not occupied, nor intended to be, protected under the home improvement regulations of the Consumer Fraud Act? This question was addressed in the recent case of Luma Enterprises, L.L.C. v Hunter Homes & Remodeling, L.L.C., Superior Court of New Jersey, Appellate Division, Docket No. A-6094-11T3. (July 1, 2013) [READ CASE HERE]

In that case, plaintiff contracted with defendant to renovate a structure into a daycare facility. Plaintiff agreed to pay the contract price in installments. Both parties agreed that failure to make an installment payment within ten days of its due date would result in a material breach. During renovation, plaintiff made two untimely payments, but defendant continued to work on the project without protest. After receipt of a third late payment, defendant stopped working on the project. Plaintiff filed a complaint and alleged

·Consumer fraud; and

·Breach of contract.

The Court dismissed the consumer fraud complaint. It found that the Consumer Fraud Act (“CFA”) did not apply due to the building was not occupied as a residence. Plaintiff appealed.

Plaintiff argued that the property’s residential zoning gave it an inherent residential use and thus was considered a “home improvement” under CFA regulations. The Court, however, held that plaintiff never intended the structure to be used as a home or place of residence – and indeed, no residents were living there – therefore the CFA was not applicable.

This holding meant that the Contractor was not held liable under the Consumer Fraud Act.

On August 8, 2012, Square, the mobile payment device start-up, announced its decision to join forces with Starbucks. The two entities will unite at thousands of Starbucks locations across the United States to allow customers the option of paying for their purchases through the Square mobile phone application. The joint venture has left many asking what this will mean for the retail payment industry.

Customers will have the option of making on-site payment through the mobile payment application. The venture will also process debit and credit card transactions. The aim is to streamline the payment process and strengthen the industry-wide initiative to eliminate money.

Starbucks will process customers’ orders through Square software installed on Starbucks’ existing registers. In the alternative, customers can instead use the Square-created “dongle.” The dongle attaches to a mobile phone or iPad and transforms that product into a debit or credit card processor.

The mobile payment sector is becoming a very significant part of how customers transact business, and Square’s may have just put itself at the forefront of this booming enterprise. Square’s product is so attractive to merchants because of its ease of use. If mobile payment continues to make such an immense impact on how we make purchases, the plan to eradicate cash just might materialize.

While Square has designed its own products and patented some of its technology, its model is not completely novel. Square has managed to combine and make use of existing products, such as the iPad, with existing ideas that other mobile payment operators make use of, and throw a twist on it to make an innovative product. It will be interesting to see if any intellectual property disputes arise from Square’s use of an old but revised idea.

In Fabrau, L.L.C. v. Prashant Shah, et. al., No. A-4464-10T3 (N.J. Super. Ct. App. Div. July 11, 2012), the Appellate Division of the Superior Court of New Jersey was presented with the following question: Should parties be bound by an executed operating agreement that was not intended by all the parties to be final when there is evidence that a subsequent operating agreement was created but was not signed?

In that case, Fabrau, L.L.C. (“Fabrau”) filed a complaint against two of its alleged members, Prashant Shah (“Shah”) and Srinivisa Nallamotu (“Nallamotu”) (collectively “Parties”) for breach of the confidentiality and non-competition provisions of an operating agreement. Id. at 2.

Fabrau sought to develop low-cost, transparent software to assist in setting prices for pharmaceuticals sold by smaller pharmaceutical companies to government entities. Chester Schwartz (“Schwartz”) was approached to help with sales and marketing, Nallamotu was approached because he was also interested in a more affordable alternative to a government pricing system and Shah was approached to help develop the product. A draft amended operating agreement was created naming the members as Fabriczi (one of the creators of Fabrau), Rau (the other creator of Fabrau) (collectively “The Creators”), Nallamotu, Schwartz and Shah. However, Shah sent an email explaining that there was changes he wished to discuss as per his lawyer’s suggestion. At some point either before or after this e-mail, an undated draft operating agreement was executed by everyone except Nallamotu in a parking lot.

Fabrau argued that the signed agreement was final and binding on both Shah and Nallamotu because, although Nallamotu did not sign it Nallamotu had written an e-mail to a customer announcing that he had formed a company with a few people from the industry. See Id. at 5. Fabrau contended that this evidenced Nallamotu’s intention to be bound by the operating agreement. See Id.

In contrast, Shah asserted that he was induced to sign the agreement by The Creators’ representation that Schwartz would not do his part of the work unless an agreement were signed; Shah also claimed that all who signed in the parking lot acknowledged that the agreement was not binding. See Id. Nallamotu asserted that the fact that he never executed the agreement at issue should have been enough to show that he was not bound by its terms.

The Appellate Division pointed to evidence that showed that sometime after the execution of the initial agreement, another member was recruited to the company. The operating agreement was amended to reflect Christopher Biddle’s (“Biddle”) name, however, it was never executed. A subsequent email was sent to all of the members asking that the document be executed and a few days after that another email listed the execution of the agreement as one of the “Company Action Items.” Id. at 7. The Parties contended that the unexecuted document further evidenced that no agreement was ever reached.

After months of struggling to make sales of the pricing system, and after months of no communication between the members, The Creators decided to contact an outside vendor to see about converting the Shah-designed government pricing system to a web-based application. Then they contacted a venture capital company (“Company”) to promote the product. Unbeknownst to The Creators, Shah and Nallamotu had also contacted the Company for help with the same product. As a result of intellectual property concerns, the Company made inquiries that led to The Creators and Shah and Nallamotu finding out that each group was trying to promote the product. The Creators consequently filed a lawsuit against Shah and Nallamotu.

At trial, the Superior Court of New Jersey, Law Division, found that because Shah was admittedly the sole creator of the product, he had an ownership interest in the software. Further, they found that no certificate of formation of Fabrau named Shah and Nallamotu as members of the company. The Law Division concluded that a viable partnership agreement had never been reached by the parties.

On appeal, the Appellate Division agreed with the Law Division and also found that there was no meeting of the minds with respect to the operating agreement. It remained unexecuted in the Parties’ eyes at the time it was presented to Biddle and thereafter (as evidenced by the e-mail asserting that execution of the agreement was on the “Company Action Items” list). See Id. at 15. Ultimately, the Appellate Division found that the agreement that was executed in the parking lot was a sham designed to mislead Schwartz into believing that his expectations would be protected if he proceeded. The parties’ conduct failed to manifest intent to be bound by their initial agreement. See Id. at 17. The Appellate Division affirmed the Law Division’s holding that no contract existed, and Shah and Nallamotu could not be bound. See Id.

Proof of execution of an agreement is not the only thing that courts use to determine the rights and obligations of parties. As shown in Fabrau, a court might consider the intent of the parties in conjunction with electronic communication that evince a contrary intention than what is displayed in the agreement. The parties should have a common understanding of their expectations and responsibilities under the agreement. Most importantly, it is vital that any correspondence or documentation between the parties reflect what they intend. This will serve to increase the agreements enforceability in court.

In Martin Heller v. Lauren Gardner Trust, No. A-0914-11T2 (N.J. Super. Ct. App. Div. June 27, 2012), the court considered the enforceability of a “put offering notice, by which one or more members could require the other members to buyout their shares.” The mechanism was straightforward. It involved the following:

Under the terms of the Agreement, ‘upon receipt of the Put Offering Notice, the responding member shall be obligated to purchase the Membership Interest of the Initiating Member at the purchase price set forth in subsection (b) of this Section 6.03.’

Id. at 3.

In that case, the issue was whether an April 27, 2010 letter from one of the members to the other was enough to invoke the put option. The letter stated, in part, “as per page 19 paragraph 6.03-Put Option, this letter should be construed as a put offering notice.” The court determined that the letter was clearly sufficient to invoke the Put.

In Merrill Lynch v. Cantone Research, Inc.,___ N.J. Super. ____ (N.J. Super. Ct. App. Div. 2012), the Appellate Division of the Superior Court of New Jersey was presented with the issue of whether a party may be forced to arbitrate in a situation in which they did not sign a contract that included an arbitration clause about the subject matter of their arbitration. The court determined that a party could not be forced to arbitrate under such circumstances.

That case involved an arbitration relating to a transaction involving securities fraud. The question was whether the arbitrations should take place under the Financial Industry Regulatory Authority, Inc. (“FINRA”), given the fact that the parties had not explicitly agreed to do so.

The court found that the arbitration clause did not apply since there was no “exchange-related dispute.” This was because the dispute arose out of an unusual set of circumstances. The investors were victims of a Ponzi scheme perpetrated by Maxwell Baldwin Smith. “Smith induced the investors to invest, in the aggregate, approximately $8 million in a non-existent investment product . . . instead of investing their money, Smith deposited the funds into Merrill Lynch account held in his and his wife’s name. The account was opened, maintained, and utilized by Smith for the sole purpose of facilitating the fraudulent scheme.” Id. at 3-4.

For that reason, the court concluded that because there was no “exchange-related dispute,” the arbitration agreement that related to such disputes did not apply.

In The Provident Bank v. Charles Bonnici, No. A-1586-11T1 (N.J. Super. Ct. App. Div. 2012), the Appellate Division of the Superior Court of New Jersey considered the issue of what is a reasonable manner to sell collateral to satisfy a debt.

In that case, the debtor had purchased a boat and taken out a loan to fund the purchase price. He defaulted on the loan, and the creditor decided to sell the boat to offset what was owed. The issue was whether the creditor had done so in a commercially reasonable way.

The Court started its analysis “with the premise that, upon default, a secured party may sell collateral pursuant to the terms and conditions of N.J.S.A. 12A:9-610(b). The disposition may be public or private. N.J.S.A. 12A:9-610(b). ‘Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” Id . at 4.

Commercial reasonableness is determined if the sale is made:

(1) in the usual manner on any recognized market;

(2) at the price current in any recognized market at the time of the disposition; or

(3) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

N.J.S.A. 12A:9-627(b).

In the Bonnici case, the Court determined that the sale had been conducted reasonably. The plaintiff used a “business dedicated to that service” to sell it; valued the boat by using the NADA authoritative guide; and took into account the condition of the boat.

Post navigation

Small Business[MUSIC PLAYING] We enjoy representing entrepreneurs. I started this law firm over a decade ago. And the truth is that I enjoy representing entrepreneurs because I identify with them. And so, when someone comes to me and they want to start a business. They are speaking about becoming an entrepreneur, I take it really seriously. And I listen to their story. And I'm really interested in what their plan is and how it's going to work. It's just beginning. And in that state, it needs something of, I guess, tender loving care by its accountant, by its insurance agent, and by its lawyer. While we certainly represent a significant number of large multinational companies and handle their legal issues, we also have a strong core of clients who fall under the category of start-ups and small to medium size businesses. In a lot of respects, this is a very fulfilling and unique client representation. Many of these companies are not quite of a stature that they have their own in house legal department, so we really serve as their general counsel. They're calling us for their day to day legal matters, as well as the unique ones. So what that means is that we're dealing with everything from their corporate governance issues, attending board meetings, dealing with their employment contracts, intellectual property, customer contracts, and everything that really comes up in the day to day operation of their business, as well as the big deals and transactions, as well as the litigation matters that they face. Another interesting aspect to this is whether the business is a family business. Frequently, when you see an entrepreneur, what they want to do is have their family get involved in the business for two reasons. The first reason is family will usually not demand high salaries or, in the beginning, they might not demand anything. They may do it as a labor of love. And the second thing is that family can be trusted. And this all works to an extent. But there's also important legal protections that have to be put in place. Even though it's a family business, it has to be treated professionally. That means there have to be contracts. There have to be employee manuals. There has to be policies and procedures. There have to be lines of authority. And that's important, not so much because people don't trust one another, it's more because businesses run better when everyone knows what they're doing and what's expected of them. Then there are less misunderstandings, less miscommunications. And so, again, this is one of those areas where the dynamic of the situation, the understanding of the psychology, if you will, of how this business is running, and who these people are, and how they're relating to one another, is just as important as the legalities themselves. And, in an interesting way, the legalities reflect those relationships. Our firm truly welcomes entrepreneurs who wish to start a business or have started their business and wish to expand. We are very eager to have those discussions and would welcome the opportunity to advise such clients if they need us.

Nonprofit Law Info Blog

Non-Profit Law[MUSIC PLAYING] One of the areas of law that we truly enjoy is the representation of nonprofits. In other words, charities. This involves not only forming charities, determining whether the charity will be a 501(c)(3), a 501(c)(4), or with respect to a house of worship, it might not even need to be either in order to be classified as a charity, to how the company that is in a nonprofit mode can maintain that mode. In other words, just because you obtain 501(c)(3 status doesn't mean that you keep it. You have to be vigilant. You have to understand that there are ways that the nonprofit must operate which really don't apply to a for profit company. Such things, for example, as executive compensation. The executive compensation has to be in a different model than a for profit company would necessarily have to have. In addition, there are issues relating to contracts, employment disputes, landlord tenant issues, all the panoply of legal matters that would apply to a for profit or a nonprofit company. But it's always informed by the fact that these nonprofits generally are underfunded, at least in the sense that they want to spend their money doing good for the world, as opposed to dealing with their lease or their vendors. And in addition, that there's always a sense that there is a mission here. An aspect of representing nonprofit entities that often arises comes out of the complications from the fact that most of these entities are primarily, if not entirely, staffed by volunteers. This presents some unique situations. First, the volunteer may not be so inclined to sign the normal documentation that you would ask an employee to sign. Some of the things that an entity needs to have in place to secure its rights and to make sure it's protected are the same as those of any other business. But a volunteer is not going to necessarily look as kindly towards signing those documents. It also means that you may have someone who's very passionate about the mission of the organization, but is not necessarily as motivated to adhere to the governance issues, or to hear what the attorney is saying in terms of the complications that could arise. Sometimes you also have some political strife or conflict between the volunteers and the paid staff, and how to address that from both a documentation point of view, but also the realities of resolving those disputes in a way that's amicable, considering that everyone is doing this for a purpose, for a mission, and how can you get both sides to be on the same page and drive that purpose. And so all of these issues we find to be absolutely fascinating and very meaningful. As a matter of fact, many of our attorneys have served and do serve on the boards of trustees for non-profits. So, in many ways, we find this area of law to be particularly meaningful. And we enjoy doing it. And we look forward to having a practice that incorporates this important aspect of commercial law.

Franchise Law Info Blog

Franchise Law[MUSIC PLAYING] Our firm handles a number of franchise law matters. This has become something of a cottage industry recently, simply because with the economic ups and downs, more and more people want to own their own businesses. Franchises are supposed to be turnkey operations. They're supposed to be situations in which you just walk in to a thriving business where all the major decisions have already been made in terms of how it's going to look, what the product is going to be, how it's going to be distributed and manufactured, how it's going to be presented to the public. And so it seems as if it's much easier and less complex than starting from scratch. But, as with everything involving legal matters, the devil is in the details. We have found that the franchise agreements that people are asked to sign are unusually complex, and surrender a plethora of rights that normally would not be surrendered when someone is starting a business. The truth is that franchises involve renting a business, in essence, using a business model rather than owning it. The way lawyers describe that is they describe it as licensing the intellectual property that is owned by the franchisor. And in addition to that, the franchisor has an unusual amount of involvement in very basic decisions, not just the placement of marketing for the product or the way the product will be sold to the public, but also such things as the lease for the property and whether the person will locate the franchise in one area or another. We can have a wonderful opportunity to start a franchise in a particular area, and suddenly that is undermined because the franchisor puts another franchise for the same product within proximity. And all of a sudden, something that looked great now is not so great. Well, there are certainly differences between operating a franchise and operating any other type of business. There's also a lot of similarities. Any of the issues that a business owner is going to have to address in terms of employment issues, leasing commercial real estate issues, intellectual property, IT services, that's all still going to need to be addressed by a franchisee. Sometimes it might be easier because of the relationship with the franchisor. Some of the services may already be packaged for them. But that can also make it more challenging. There's going to be compliance issues with that bulky franchise agreement that they are given, as well as complication if the package that they're being provided by the franchisor is not one that is suitable to them, or things are not working, and then overcoming the challenges of that aspect. But by and large, you'll see that there are a lot of similarities. So, all of the things that we recommend for general business owners are also going to be recommended for a franchisee. Another example of that would be that, certainly, even if a property is being operated as a franchise, it still needs to have its own corporate governance structure. The owners should still form an LLC or a corporation and enable itself to take advantage of the corporate liability shield for operating the business. All contracts that that business has, including the contract with the franchisor, should be through that entity. There is something inspiring about representing people who go out there and start their own businesses, start their franchises, work hard, and try to make a go of it. And we find that these relationships with these clients can be some of the most rewarding that we have.